The dollar started the first week of the new year slightly lower, giving way to the European currency. The latter used the holiday as an advantage and gained speed overtaking the USD. However, experts believe the situation will stabilize soon and the greenback will become a leader.
At the end of the previous week, at the end of 2022, traders did not take any risks and preferred to stay with the dollar. At the same time, big players raised the number of buy contracts for the dollar index (USDX) by 200. Furthermore, the figure was 16,900 longs, reaching the highest level since July 2021.
According to the current USDX reports, there was a slight surge in bullish sentiment for the U.S. dollar by the end of 2022 - early 2023. Leading market players have increased their positions on USD growth after the recent sharp decline. Strengthening this trend will help the dollar's growth in early 2023, analysts believe.
However, the first week of January was more favorable for the euro than the dollar. Taking advantage of the dollar's short-term weakness, the euro gained strong momentum and at a certain moment crossed the 1.0700 barrier. However, later on the euro failed to retain its positions, though it was still at its best. On Monday morning, January 2, EUR/USD was trading at 1.0695, trying to go higher from time to time.
Earlier, at the end of 2022, the greenback was boosted by factors like the Federal Reserve's monetary tightening, difficult trading conditions amid a significant rise in energy costs and the tense geopolitical situation. However, at the beginning of the new year, many of these drivers lost their power. The planning horizon for the USD has narrowed, making it difficult for experts to predict the medium- and long-term dynamics of the EUR/USD pair.
Many experts believe that at a certain moment the pair will be able to cross 1.0700 and reach 1.0750. However, right now there are no suitable conditions for this. Some analysts are wondering about the fair exchange rate for the EUR/USD pair, which is due to the different inflation rates in Europe and the US, as well as different approaches to the monetary policy of the European Central Bank and the Fed. Recall that the latter has a target inflation rate of 2%, while the actual rate is 9%. The situation in the euro area is largely similar, although the target inflation rate here is slightly higher.
Looking at the ratio of inflation in the U.S. and the euro area, in particular the so-called "cumulative inflation" over the past few years, experts conclude that the euro is undervalued and the USD is quite stable. Having analyzed the changes in consumer price indexes over 22 years, experts note that the cumulative inflation in the euro area was 61%, while in the U.S. it was at 76%. At the same time, the inflation rate in the EU has only recently exceeded that in the United States. The reason is a powerful energy crisis that forced a review of most macroeconomic indicators.
According to currency strategists, now the euro should be 15% more expensive than a few years ago, and the fair value of the euro should be 1.1400. Take note that the euro is currently trading at half that level. As for the greenback, it is accumulating forces before a new breakthrough. According to analysts, the greenback has a good chance of further growth, as markets expect a "soft landing" from the Fed on monetary policy in 2023.
